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Is Microsoft Targeting the Wrong Search Company?

We have heard enough in the press about Microsoft aiming for Google as its deadliest enemy in the marketplace. While the very mention of the search engine might not bring on a fit of chair-throwing from Steve Ballmer, we know Microsoft takes the company very seriously. Why is Microsoft all but ignoring the older, more established Yahoo!? And could it be making a mistake to do so?

Surely I’m not the only one who has spotted this. Make a list of the various services available, for free or otherwise, from Google. Make the same list for Yahoo! They won’t be identical, but they will be strikingly similar. Yahoo! has been around several years longer than Google, and is still considered one of the top search engines on the market. For that matter, Lycos is even older than Yahoo! and also has a wide variety of services available, including email, blogging, news feeds that can be personalized, and more. But Microsoft isn’t focused on Lycos or Yahoo!; it has Google in its sights. Why?

Well, the fact that Google is younger than Yahoo! may have something to do with it, at least indirectly. Google showed up, seemingly out of nowhere, and, faster than you can say “moving at Internet speed,” became the dominant search engine company. Just as quickly, it ventured into a lot of different territories: email, blogging, online photo sharing, chat clients, and on and on. That proved the company was ambitious, and could execute quickly and effectively; both of these qualities are dangerous to an established player like Microsoft.

Of course, Microsoft was absolutely forced to take notice as soon as Google came out with its Desktop Search, though the competition started sooner than that. Indeed, a widely published (and lengthy) memo written by Microsoft CTO Ray Ozzie states that he believes Google to be the biggest threat to the software giant’s dominance on the desktop. Yahoo! is hardly mentioned in the memo at all.

That could turn out to be a mistake on Microsoft’s part. It is impossible to say whether this is the result of actual planning on Yahoo!’s part, but it is currently flying under Microsoft’s radar. Actually, it is currently flying under the radar of a lot of its competitors – and I don’t know about the rest of you, but I’ve played enough multi-rival games to know that sometimes the cleverest way to win is by watching the big guys tear each other apart while you quietly build your own empire.

{mospagebreak title=How Do They Compare?}

It wasn’t always like this. Less than three years ago, Yahoo! CEO Terry Semel was asked in an interview whether his company was considering a purchase of Google. Now, the thought of Yahoo! possibly buying Google is enough to boggle the mind. The two companies brought in similar net income during a recent quarter, though Yahoo! had somewhat less revenue. That bespeaks better efficiency than Google, perhaps, but it also indicates that Google is growing faster – which is one of the big reasons that Microsoft sees Google as the bigger threat.

A look at how Wall Street values the two companies is also instructive. At $42 per share for its stock, Yahoo! is almost a bargain, with a market capitalization of a little under $60 billion. Google, with stock trading somewhat to the north of $400 per share, has a market cap of more than $126 billion. So Wall Street seems to think Google is more than twice as valuable as Yahoo!.

But are we comparing apples and oranges here? Some time ago, I wrote an article that compared the strategies of Google and Yahoo!. While Google keeps insisting that its mission is to organize all of the world’s information and make it searchable, Yahoo! approaches things differently. It identifies itself as “a leading global Internet communications, commerce and media company” rather than a search company. It is this different approach that may be keeping it under Microsoft’s radar.

Yahoo! has always considered itself to be a media player, according to its co-founder Jerry Yang. But it has begun to emphasize that aspect of itself more and more lately. It started with the hiring of Terry Semel as CEO back in 2001. Semel spent most of the quarter century before that working for Warner Brothers, including as chairman and co-CEO. Warner Brothers is itself a media player par excellence; no doubt the folks at Yahoo! wanted some of whatever Semel did to build his former company up from making less than $1 billion from one revenue source to nearly $11 billion from multiple sources.

It looks as if Semel will fulfill that promise. At the beginning of 2005, Yahoo! formed a media group in Southern California to handle various entertainment properties and to deal with Hollywood executives. The unit is being run by a former ABC television executive. Yahoo! COO Dan Rosensweig wrote of the move that “By becoming a more integral member of the media community, we will bolster our ability to further grow and develop unique, compelling offerings for both consumers and advertisers.”

{mospagebreak title=Is Yahoo!’s Approach Working?}

Yahoo! has strong justification for calling itself a media company. Let’s take a look at the companies it has cut deals with in the past year. These include Mark Burnett Productions (famous for, among others, “The Contender” and “The Apprentice”); Investor’s Business Daily; O’Reilly Media; SBC Communications; Sprint; Verizon; BellSouth; TiVo; and, among many others…Microsoft.

Is this another sign that the software giant is underestimating Yahoo!? To quote the Ozzie memo mentioned earlier, the second place search engine seems to be barely worthy of notice. “Although Yahoo also has significant communications assets that combine software and services, they are more of a media company and – with the notable exception of their advertising platform – they seem to be utilizing their platform capabilities largely as an internal asset.”

Somehow, Yahoo! has found a way to target multiple areas in which to compete, such as music, search, and e-commerce, without angering a major player in any of these fields. This means that companies you may be competing with are still willing to partner with you. For example, in October 2005, Microsoft and Yahoo! agreed to make their instant messaging software compatible.

This also means that your competitors in general don’t see you as a serious threat. Apple’s iPod and iTunes may be a major source of its revenue, but it doesn’t seem to be particularly concerned about Yahoo!’s music business. Likewise, eBay isn’t at all worried about the auctions on Yahoo!’s network.

Not being seen as a threat could be a good thing in other ways. You may have heard a lot of discussion about something called “Web 2.0.” According to a report from Knowledge@Wharton, this is supposed to be “a Web-based computing platform with easy-to-create services that will replace what desktop software does today.” Who will dominate Web 2.0 depends on which company’s application program interfaces (APIs) become the standard. Both Google and Microsoft are building APIs for the future – but even companies such as Amazon and Salesforce.com are making their APIs available to speed up Web 2.0 development. Yahoo! is also becoming a major API player, which could help secure its future position in whatever the Internet turns into next.

{mospagebreak title=The Down Side}

When it comes to running a business, I’ve heard plenty of discussion about the pros and cons of concentrating on one or two core strengths. I’ve also heard plenty about the pros and cons of diversifying. I’m not sure myself which approach is better, and I’m willing to grant that either one can work, given the right market and the right execution. That said, Yahoo!’s “all things to all people” plan could cause it to stumble in the future.

Wharton marketing professor Xavier Dreze believes Yahoo!’s attempt “to own as much as possible” risks creating a lack of focus. “Everyone knows what Google does; it’s a search engine. We know what Google is good at, but Yahoo is less clear. If Yahoo keeps trying to be all things to all people, it could become vulnerable.” Indeed, according to ComScore Networks, Yahoo!’s share of the search market currently trails Google’s by nearly ten percentage points.

On the other hand, it’s worth keeping in mind that the Internet pie is constantly growing. In fact, Microsoft, Yahoo!, and Google could conceivably build perfectly fine businesses without seriously competing with each other. It won’t happen, in part because Microsoft and Google seem to be naturally competitive, aggressive companies. But it’s still a good thing to remember, as Kendall Whitehouse, senior director of information technology at Wharton notes. “The Web isn’t a zero sum environment, so it’s not a simple matter of whether Yahoo or someone else will win.”

Still, it’s interesting that Yahoo! has managed to not appear to be a threat, despite dipping its fingers into every pie. Even if it loses its focus, that could help save it in the long run, when Microsoft and Google finish tearing each other apart. Whitehouse sagely recalls history when he observes that “By focusing on being a media company and a content delivery platform, Yahoo may be able to stay out of Microsoft’s crosshairs longer than some of its competitors. And history has shown that the consequences of tackling Microsoft head-on can be dire.”